T. Rowe Price Retirement 2055 Fund

N-CSRS 1 srrpm.htm T. ROWE PRICE RETIREMENT 2055 FUND T. Rowe Price Retirement 2055 Fund - November 30, 2007

Item 1: Report to Shareholders

Retirement 2055 Fund

November 30, 2007

The views and opinions in this report were current as of November 30, 2007. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.

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Manager’s Letter

Fellow Shareholders

Markets were volatile during the six months ended November 30, 2007, as problems in the subprime mortgage market spread to other asset classes. U.S. stocks were especially weak amid concerns that rising mortgage delinquencies and energy costs, a weakening housing market, and turmoil in some segments of the fixed-income market would derail the economy. Investment-grade U.S. bonds produced strong returns, however, as Treasury yields plunged and the Federal Reserve reduced short-term interest rates to bolster the economy. Led by equities in emerging markets, non-U.S. stocks outperformed their domestic counterparts, and a weakening dollar enhanced overseas returns in dollar terms. Results were mixed for the Retirement Funds: Those funds with the largest allocations to bonds posted narrow gains, while those with heavier stock exposure fell slightly.

HIGHLIGHTS

• Markets were volatile during the past six months as problems in the subprime mortgage arena spread to other asset classes.

• The Retirement Funds struggled in this environment, benefiting from the flight to safety in the bond market but hurt by their exposure to a weak U.S. stock market.

• We continue to overweight stocks relative to bonds but reduced our equity exposure slightly in light of slower U.S. growth expectations.

• While periods of turbulence cannot be avoided, we believe the Retirement Funds’ disciplined strategy and broad diversification can help shareholders achieve their retirement-funding goals.

MARKET ENVIRONMENT

According to the most recent estimates, the U.S. economy expanded vigorously at an annualized rate of 4.9% in the third quarter. However, growth is expected to slow dramatically in the months ahead due to the deepening downturn in residential real estate, a slower pace of job growth, rising energy prices, and generally stricter bank lending standards.

The collapse of the subprime mortgage market was the real story. Lenders who backed home borrowers with poor credit came under pressure as resetting mortgage rates led to delinquencies and defaults. The problems spread from mortgage companies to big Wall Street firms and major commercial banks, and liquidity in the financial markets—particularly in the asset-backed commercial paper market—quickly evaporated during the summer and again in November. This prompted investors to seek the relative safety of U.S. Treasury securities.

The Federal Reserve responded to this liquidity crisis by reducing the discount rate—the interest rate paid by financial institutions that borrow from the central bank—and adding billions of dollars to the banking system on several occasions starting in mid-August. The central bank also reduced the fed funds target rate, an interbank lending rate that banks also use as a benchmark for their prime lending rates, from 5.25% to 4.50% in the last three months of our reporting period. These were the first changes in the fed funds rate since June 2006 and the first rate cuts in more than four years. (After our reporting period ended, the Fed reduced the fed funds rate to 4.25% on December 11.)

As shown in the graph, Treasury bill yields—which tend to track the federal funds target rate—fell sharply in the last few months. Intermediate- and long-term interest rates fell to a lesser extent. The Treasury yield curve, which depicts the relationship between the yields and maturities of government bonds, steepened significantly, as investors anticipated additional short-term rate cuts in the months ahead.

U.S. stocks fell in the last six months, as corporate earnings growth in the financials sector weakened, the boom in leveraged buyouts by private-equity firms petered out due to tighter credit conditions, and investors anticipated that housing weakness and rising energy costs would dampen consumer activity. Amid heightened market volatility, large-cap shares (S&P 500 Index) held up significantly better than smaller companies (Russell 2000 Index). As measured by various Russell indexes, growth stocks held up much better than value across all market capitalizations, especially among small-caps.

U.S. bonds produced solid returns, as rising prices in response to falling interest rates enhanced returns from income. In the investment-grade universe, Treasuries did best, whereas gains among mortgage-backed securities and high-quality corporate bonds were more modest. High-yield issues declined as investors shunned assets with higher credit risks. The Lehman Brothers U.S. Aggregate Index, a broad measure of the taxable, domestic, investment-grade bond market, returned 5.32% in the last six months.

Non-U.S. stocks outperformed their domestic counterparts, as rising foreign currencies versus the U.S. dollar enhanced returns in dollar terms. Emerging market equities did best, especially in Asia. Among developed markets, Europe outperformed Japan. The MSCI EAFE Index, which measures the performance of mostly large-cap stocks in Europe, Australasia, and the Far East, returned 2.95%.

HOW OUR RETIREMENT FUNDS WORK

As life expectancies have increased and traditional company pensions have diminished, more of the retirement savings burden now falls on individuals, who face the specter of outliving their assets. Our Retirement Funds help investors address this new retirement landscape. The funds are designed to provide shareholders a single, diversified portfolio that is managed to a specific retirement date and continues to provide age-appropriate asset allocation throughout retirement. Each Retirement Fund offers exposure to different asset classes and market capitalizations. The funds include international as well as domestic investments, and both growth and value investment styles. The funds are “funds of funds,” achieving their diversification by investing in other T. Rowe Price mutual funds.

The target-date funds systematically shift their allocations over time, investing in an age-appropriate proportion of stock and bond funds as the target retirement date draws near. The closer each fund gets to the stated retirement date, the more conservative its asset mix becomes, placing a greater emphasis on income and reducing overall risk. These shifts are intended to facilitate the accumulation of assets prior to retirement, as well as help investors manage their assets after retiring.

What makes our funds different is our belief that investors need a greater allocation to stocks than has generally been recommended—both before and during retirement—to achieve their long-term retirement goals. Where many similar strategies reach a stable, typically very conservative allocation to stocks shortly after they reach their target date, our funds have approximately 55% in stocks at their target dates, and that allocation gradually diminishes over the next three decades. About 30 years after its designated retirement year, each fund will reach and maintain a stock allocation of about 20%. The Retirement 2005 Fund, for example, has reached its target date but continues its gradual equity reduction. At the other end of the spectrum, the Retirement 2050 and 2055 Funds are at their highest equity allocation of approximately 90%. For all target-date funds, the remaining assets are invested in fixed-income securities, including short-term securities. For those who prefer a more traditional asset allocation strategy, the Retirement Income Fund maintains an asset allocation of about 60% bonds and 40% stocks.

We may make some limited tactical variations to each fund’s target allocation. The T. Rowe Price Asset Allocation Committee considers adjustments to the weightings of stocks, bonds, and money market securities within the appropriate ranges for each fund, based on market conditions and economic fundamentals.

We believe the funds offer a convenient approach to retirement investing because investors do not have to determine a suitable asset allocation strategy, select the funds to implement the strategy, worry about managing the asset allocation strategy over time, or make tactical adjustments in response to changing market conditions. Because the underlying funds invest domestically and internationally in a wide range of equity and bond market sectors, investors gain the benefits of diversification as well as the expertise of individual fund managers who invest in these areas on a daily basis. Fund expenses are limited to the expenses of the underlying funds, so there is no additional management fee charged for the asset allocation services we provide.

STRATEGY

As we mentioned in our annual report six months ago, we began to gradually increase the non-U.S. equity exposure within the Retirement Funds to take better advantage of investment opportunities outside the U.S. We expect this process to continue through 2008. We also announced in the last report that the funds were authorized to invest in the T. Rowe Price Emerging Markets Stock Fund. Given high valuations, we chose to delay implementation until late in the period. Although valuations are still relatively high, the underlying fundamentals of developing markets remain attractive, and we decided to begin establishing a position in November. We originally anticipated funding over two years, but are now targeting a 12-month period.

We continue to overweight stocks relative to bonds, although we moderated our overweight in light of slower U.S. economic growth expectations. We ended the period with a 1.5% overweight to stocks, down a quarter point from six months ago. The global growth environment remains a positive despite the slowdown in the U.S. economy, and solid, albeit slower, corporate profit growth should continue to be supportive for equity markets.

Within our stock allocation, we continue to favor large-caps over small-caps following a prolonged period of small-cap outperformance. We further trimmed our small-cap position during the period, as small-cap valuations remain rich relative to large-cap stocks. Within our large-cap holdings, we also remain overweight to growth because we believe that in a period of solid but slower earnings growth, investors are likely to pay a premium for high-quality large-caps whose earnings grow faster than the market.

Early in the summer, prior to the credit crunch, we reduced the funds’ high-yield exposure in favor of investment-grade bonds. In general, high-yield fundamentals remain favorable with solid corporate profits and historically low corporate default rates, but valuations appear relatively rich.

PERFORMANCE REVIEW

We think the Retirement Funds’ performance is best benchmarked against each fund’s combined index portfolio, as shown in the Performance Comparison tables. Our combined index benchmarks are constructed to reflect our actual strategy. The domestic equity allocation (currently composed of the Growth Stock, Value, Equity Index 500, Mid-Cap Growth, Mid-Cap Value, New Horizons, Small-Cap Stock, and Small-Cap Value Funds) is benchmarked to the Dow Jones Wilshire 5000 Composite Index, which tracks the entire U.S. equity market. The corresponding index for our non-U.S. stock allocation (International Stock, International Growth & Income, Overseas Stock, and Emerging Markets Stock Funds) is the MSCI EAFE Index. Fixed income (New Income and High Yield Funds) is measured against the Lehman Brothers U.S. Aggregate Index, and short-term income (Short-Term Income Fund) by the Citigroup 90-Day U.S. Treasury Bill Index. The tactical moves we make in the portfolios are not incorporated into the combined index benchmarks.

Our Performance Comparison tables also show the returns for each fund’s respective Lipper target-date categories. Although the categories aren’t always perfect matches—Lipper does not yet have categories in five-year increments—they provide a good idea of how our funds perform relative to funds with similar objectives. We continue to show the Dow Jones target-date indexes in our Growth of $10,000 tables following this letter. In general, we think these indexes are not as good a fit as our combined index portfolios because their allocation shifts do not match ours and because their construction tends to overweight certain sectors beyond their true weight relative to the overall market. They also have lesser exposure to stocks than our funds as retirement nears and during the retirement years.

All Retirement Funds underperformed their respective combined index portfolios for the six-month period ended November 30, 2007. The inclusion of high-yield bonds, which are not included in the benchmarks, hurt relative performance, although moving to an underweight helped to mitigate the weakness. Our heavier exposure to stocks relative to our neutral weightings, which has been a long-term benefit to results, also detracted since both domestic and foreign equities lagged investment-grade bonds during the period. Within equity, our tactical position—overweighting large-caps versus small-caps and growth relative to value—aided results as small-caps significantly lagged and growth outperformed.

On the domestic equity side, Growth Stock and Mid-Cap Growth were the strongest absolute performers and the only funds that posted positive returns for the six-month period. Mid-Cap Value, Small-Cap Value, and Small-Cap Stock posted the worst returns as each declined more than 8% during a tough period for both value stocks and small-caps. Relative to the Dow Jones Wilshire 5000 index, our best contributors were Mid-Cap Growth, Mid-Cap Value, and Small-Cap Value. Overall, our international equity allocation (International Stock, International Growth & Income, and Overseas Stock Funds) posted gains but lagged the MSCI EAFE Index.

The Short-Term Income Fund outperformed. The fund is currently positioned primarily in short-term bonds, which outpaced money market securities during the period.

RETIREMENT INCOME FUND

The Retirement Income Fund’s investment objective is to generate the highest total return consistent with an emphasis on both capital growth and income. The neutral allocation for the fund is 60% bonds and 40% stocks. The fund implements its strategy by investing in a set of underlying T. Rowe Price mutual funds.

The Retirement Income Fund returned 1.26% over the six months ended November 30, 2007, modestly lagging its combined index portfolio but outpacing its Lipper average of similar funds. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

The fund managed to post a positive return due to its fixed-income allocation as bonds outperformed stocks during the period. Our overweighting large-caps mitigated some of the stock weakness as larger company stocks outpaced smaller companies. Results relative to the combined index benchmark were hurt by our allocation to high-yield bonds, which struggled when investors sought safer alternatives. Weakness in our overall domestic stock allocation also weighed on relative results. Please see the Performance Review on page 6 for a closer look at the fund’s performance.

As of November 30, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 21. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 58.50% for cash and bond funds, up from 58.25% at the end of May, and 41.50% for stock funds, down from 41.75% six months ago.

RETIREMENT 2005 FUND

The Retirement 2005 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2005.

The Retirement 2005 Fund returned 0.89% over the six months ended November 30, 2007. The fund lagged its combined index portfolio and performed roughly in line with its Lipper average of similar funds. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

The fund managed to post a positive return due to its fixed-income allocation as bonds outperformed stocks during the period. Results relative to the combined index portfolio were hurt by our allocation to high-yield bonds, which struggled when investors sought safer alternatives. Weakness in our overall domestic stock allocation also weighed on relative results. Our overweighting large-caps mitigated some of the stock weakness as larger company stocks outpaced smaller companies. Our international funds also trailed their benchmarks. Please see the Performance Review on page 6 for a closer look at the fund’s performance.

As of November 30, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 21. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 48% for cash and bond funds, up from 46.75% at the end of May, and 52% for stock funds, down from 53.25% six months ago.

RETIREMENT 2010 FUND

The Retirement 2010 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2010.

The Retirement 2010 Fund returned 0.18% during the six months ended November 30, 2007. The fund lagged its combined index portfolio and Lipper average of similar funds. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

The fund eked out a positive return due to its fixed-income allocation as bonds outperformed stocks during the period. Results relative to the combined index portfolio were hurt by our allocation to high-yield bonds, which struggled when investors sought safer alternatives. Weakness in our overall domestic stock allocation also weighed on relative results. Our overweighting large-caps mitigated some of the stock weakness as larger company stocks outpaced smaller companies. Our international funds also trailed their benchmarks. Please see the Performance Review on page 6 for a closer look at the fund’s performance.

As of November 30, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 22. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 38% for cash and bond funds, up from 36.75% at the end of May, and 62% for stock funds, down from 63.25% six months ago.

RETIREMENT 2015 FUND

The Retirement 2015 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2015.

The Retirement 2015 Fund returned -0.30% for the six months ended November 30, 2007. The fund lagged its combined index portfolio and Lipper average of similar funds. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

The fund posted a narrow loss during the period as its heavier allocation to equities, especially the weak U.S. stock market, hurt results. Results relative to the combined index portfolio were hurt by our allocation to high-yield bonds, which struggled when investors sought safer alternatives. Our overall domestic stock allocation also weighed on relative results, although our overweighting of large-caps mitigated some of the stock weakness as larger company stocks outpaced smaller companies. Our international funds also trailed their benchmarks. Please see the Performance Review on page 6 for a closer look at the fund’s performance.

As of November 30, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 22. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 30% for cash and bond funds, up from 28.75% at the end of May, and 70% for stock funds, down from 71.25% six months ago.

RETIREMENT 2020 FUND

The Retirement 2020 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2020.

The Retirement 2020 Fund returned -0.80% for the six months ended November 30, 2007, lagging its combined index portfolio and Lipper average for similar funds. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

As of November 30, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 23. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 22% for cash and bond funds, up from 21.25% at the end of May, and 78% for stock funds, down from 78.75% six months ago.

RETIREMENT 2025 FUND

The Retirement 2025 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2025.

The Retirement 2025 Fund returned -1.14% over the six months ended November 30, 2007. The fund lagged its combined index portfolio and Lipper average of similar funds. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

The fund posted a modest loss during the period as its heavier allocation to equities, especially the weak U.S. stock market, hurt results. Results relative to the combined index portfolio were hurt by our allocation to high-yield bonds, which struggled when investors sought safer alternatives. Our overall domestic stock allocation also weighed on relative results, although our overweighting of large-caps mitigated some of the stock weakness as larger company stocks outpaced smaller companies. Our international funds also trailed their benchmarks. Please see the Performance Review on page 6 for a closer look at the fund’s performance.

As of November 30, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 23. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 16% for bond funds, up from 15.25% at the end of May, and 84% for stock funds, down from 84.75% six months ago.

RETIREMENT 2030 FUND

The Retirement 2030 Fund’s investment objective is to provide the highest total return consistent with an emphasis on both capital growth and income. The fund invests in a diversified portfolio, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implements its strategy by investing in a set of underlying T. Rowe Price mutual funds. The fund will reach its most conservative strategic allocation to stocks (approximately 20%) about 30 years after the year 2030.

The Retirement 2030 Fund returned -1.43% over the six months ended November 30, 2007. The fund lagged its combined index portfolio and Lipper average of similar funds. Returns for the fund’s Advisor and R Class shares were slightly lower, reflecting their additional expenses.

As of November 30, the fund’s assets were invested in T. Rowe Price funds according to the target and actual allocations shown on page 24. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 11% for bond funds, up from 10.25% at the end of May, and 89% for stock funds, down from 89.75% six months ago.

RETIREMENT 2035 FUND
RETIREMENT 2040 FUND
RETIREMENT 2045 FUND
RETIREMENT 2050 FUND
RETIREMENT 2055 FUND

The investment objective of the Retirement 2035, 2040, 2045, 2050, and 2055 Funds is to provide the highest total return consistent with an emphasis on both capital growth and income. The funds invest in diversified portfolios, with both an increasing allocation to bonds and an increasing emphasis on short-term bonds over time, and implement their strategies by investing in a set of underlying T. Rowe Price mutual funds. The funds will reach their most conservative strategic allocation to stocks (approximately 20%) about 30 years after their target dates.

The Retirement 2035, 2040, 2045, 2050, and 2055 Funds will follow similar investment paths for some years before their allocations begin to differ. Until that time, their performance will be measured against the same combined index portfolio. Each has a different Dow Jones Target benchmark (shown in the Growth of $10,000 graphs after this letter), but share the same combined index portfolio and Lipper category. The funds are managed as separate portfolios; because of asset flows and other technical considerations, their total returns will vary, and their allocations to underlying funds may also be slightly different.

The funds posted modest losses during the first half of their fiscal year and lagged their combined index portfolio benchmark and Lipper average of similar funds. Returns for Advisor and R Class shares were slightly lower, reflecting their additional expenses. Results relative to the combined index portfolio were hurt by our allocation to high-yield bonds, which struggled when investors sought safer alternatives. Our overall domestic stock allocation also weighed on relative results, although our overweighting of large-caps mitigated some of the stock weakness as larger company stocks outpaced smaller companies. Our international funds also trailed their benchmarks. Please see the Performance Review on page 6 for a closer look at the funds’ performance.

As of November 30, 2007, the funds’ assets were invested in T. Rowe Price funds according to the target and actual allocations shown on pages 24–26. Actual allocations reflected the Asset Allocation Committee’s decision to overweight stocks relative to bonds but to reduce that overweight slightly during the past six months. At the end of the period, the target allocations were 8.5% for bond funds, up from 8.25% at the end of May, and 91.5% for stock funds, down from 91.75% six months ago.

OUTLOOK

As we write this letter, markets around the world are experiencing turbulence. Still, we believe the environment remains supportive for equities. Profit growth will likely remain solid but should decelerate as slower U.S. economic growth and higher commodities and labor costs take their toll on corporate earnings growth. We believe that years of large-cap underperformance have created attractive valuations, and in an environment of slower earnings growth, those quality large-cap growth companies that offer consistent earnings increases should command a premium.

Whatever the near term brings, we remain focused on maintaining a disciplined, long-term strategy that we believe can help shareholders achieve their retirement-funding goals. Thank you for your confidence in T. Rowe Price.

Respectfully submitted,

Edmund M. Notzon III
President and chairman of the funds’ Investment Advisory Committee

Jerome A. Clark
Vice president and portfolio manager

December 20, 2007

RISKS OF INVESTING

The Retirement Funds’ investment in many underlying funds means that they will be exposed to the risks of different areas of the market. As with all stock and bond mutual funds, each fund’s share price can fall because of weakness in the stock or bond markets, a particular industry, or specific holdings. Stock markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment manager’s assessment of companies held in a fund may prove incorrect, resulting in losses or poor performance even in rising markets. Investors should note that the higher a fund’s allocation to stocks, the greater the risk.

Bonds are subject to interest rate risk, the decline in bond prices that usually accompanies a rise in interest rates, and credit risk, the chance that any fund holding could have its credit rating downgraded or that a bond issuer will default (fail to make timely payments of interest or principal), potentially reducing the fund’s income level and share price. High-yield corporate bonds could have greater price declines than funds that invest primarily in high-quality bonds. Companies issuing high-yield bonds are not as strong financially as those with higher credit ratings, so the bonds are usually considered speculative investments.

Funds that invest overseas may carry more risk than funds that invest strictly in U.S. assets. Risks can result from varying stages of economic and political development; differing regulatory environments, trading days, and accounting standards; and higher transaction costs of non-U.S. markets. Non-U.S. investments are also subject to currency risk, or a decline in the value of a foreign currency versus the U.S. dollar, which reduces the dollar value of securities denominated in that currency.

GLOSSARY

Citigroup 90-Day U.S. Treasury Bill Index: An index designed to track short-term government securities.

Combined index portfolios: Blended index portfolios used as benchmarks for each fund. The combined index portfolios are composed of the following indexes:

Retirement Income Fund—An unmanaged portfolio composed of 33.0% Dow Jones Wilshire 5000 Composite Index, 30.0% Lehman Brothers U.S. Aggregate Index, 30.0% Citigroup 90-Day U.S. Treasury Bill Index, and 7.0% MSCI EAFE Index.

Retirement 2005 Fund—An unmanaged portfolio composed of 41.7% Dow Jones Wilshire 5000 Composite Index, 37.0% Lehman Brothers U.S. Aggregate Index, 12.5% Citigroup 90-Day U.S. Treasury Bill Index, and 8.8% MSCI EAFE Index.

Retirement 2010 Fund—An unmanaged portfolio composed of 50.3% Dow Jones Wilshire 5000 Composite Index, 32.0% Lehman Brothers U.S. Aggregate Index, 7.5% Citigroup 90-Day U.S. Treasury Bill Index, and 10.2% MSCI EAFE Index.

Retirement 2015 Fund—An unmanaged portfolio composed of 56.8% Dow Jones Wilshire 5000 Composite Index, 27.5% Lehman Brothers U.S. Aggregate Index, 4.0% Citigroup 90-Day U.S. Treasury Bill Index, and 11.7% MSCI EAFE Index.

Retirement 2020 Fund—An unmanaged portfolio composed of 63.45% Dow Jones Wilshire 5000 Composite Index, 22.0% Lehman Brothers U.S. Aggregate Index, 1.5% Citigroup 90-Day U.S. Treasury Bill Index, and 13.05% MSCI EAFE Index.

Retirement 2025 Fund—An unmanaged portfolio composed of 68.25% Dow Jones Wilshire 5000 Composite Index, 17.5% Lehman Brothers U.S. Aggregate Index, and 14.25% MSCI EAFE Index.

Retirement 2030 Fund—An unmanaged portfolio composed of 72.35% Dow Jones Wilshire 5000 Composite Index, 12.5% Lehman Brothers U.S. Aggregate Index, and 15.15% MSCI EAFE Index.

Retirement 2035, 2040, 2045, 2050, and 2055 Funds—An unmanaged portfolio composed of 74.35% Dow Jones Wilshire 5000 Composite Index, 10.0% Lehman Brothers U.S. Aggregate Index, and 15.65% MSCI EAFE Index.

Credit Suisse High Yield Index: An index designed to track the high-yield bond market.

Dow Jones Moderately Conservative Portfolio Index: An index composed of an underlying blend of U.S. and non-U.S. stock, bond, and cash indexes. It is designed to capture 40% of the risk and return of the Dow Jones Aggressive Portfolio Index, an all-stock index.

Dow Jones target-date portfolio indexes: Indexes composed of different allocations of stocks, bonds, and cash. Each month, beginning 35 years prior to an index’s stated target date, the amount allocated to stocks gradually decreases and the amount allocated to bonds/cash increases in a predefined manner. The target date in each index’s name reflects the year the benchmark’s allocation no longer changes. At that time, the index will become the Dow Jones Target Today Index with a portfolio composed of 20% stocks.

Dow Jones Wilshire 5000 Composite Index: An index that tracks the performance of all U.S. common equity securities.

Lehman Brothers U.S. Aggregate Index: An unmanaged index that tracks domestic investment-grade bonds, including corporate, government, and mortgage-backed securities.

Lehman Brothers 1-3 Year Government/Credit Index: An index that tracks short-term debt instruments.

Lipper averages: Consist of all mutual funds in a particular category as tracked by Lipper Inc.

MSCI EAFE Index: An index that tracks the stocks of about 1,000 companies in Europe, Australasia, and the Far East (EAFE).

Russell 2000 Index: An index that tracks the stocks of 2,000 small U.S. companies.

S&P 500 Stock Index: An index that tracks the stocks of 500 primarily large-cap U.S. companies.

Yield curve: A graph depicting the relationship between yields and maturity dates for a set of similar securities. These curves are in constant flux. One of the key activities in managing any fixed-income portfolio is to study trends reflected by comparative yield curves.

Performance and Expenses

GROWTH OF $10,000

This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.